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Canada Election: Focus on Food Stocks

Ambrose O'Callaghan
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Canadians were told to anticipate higher food prices in 2019 late last year. The 2019 Canada Food Price Report projected that prices would rise between 1.5% and 3.5% this year. Produce has led the way with the average price increase between 4% and 6%. As it stands today, vegetable prices have risen by a stunning 17% to 18% year over year.

These prices have put the crunch on consumers over the past several years. It should therefore come as no surprise that the issue has reared its head in the 2019 federal election. A survey by Angus Reid and the Agri-Food Analytics Lab at Dalhousie University found that 60% of Canadians believe that food security deserves more attention in this election.

Unfortunately for those respondents, major political parties have shied away from providing any platform to address these concerns. Party leaders have discussed affordability as a narrow issue mostly related to housing.

Households with children have consistently listed affordability as their top issue. 31% of respondents in the poll did not expect this issue to be addressed by the major parties.

Grocery retailers are walking a tightrope

Competition has grown fierce in the grocery retail sector, especially with nipping at the heels of the old guard. Metro (TSX:MRU) stock has climbed 23% in 2019 as of early afternoon trading on October 10. In late 2018, Metro was my number one grocery stock to pick up before this year began.

Metro is set to release its fourth-quarter 2019 results on November 20. In the third quarter, Metro reported sales of $5.22 billion, up 12.8% from the prior year. However, sales were up just 2.3% without the addition of Jean Coutu Group.

Food same-store sales increased 3.1% in the quarter. The competitive environment has prevented grocers from dramatically hiking prices, but they are keeping up with broader increases. Adjusted net earnings at Metro have climbed 25.6% year-over-year to $230.3 million.

Loblaw (TSX:L) stock has climbed 22.8% this year so far. Revenue at Loblaw rose 2.9% year over year to $11.13 billion. Food retail same-store sales growth was just 0.6%. Similar to Metro, Loblaw got its biggest boost from drug retail, as it reported same-store sales growth of 4%. Adjusted EBITDA surged 39% from the prior year to $1.17 billion.

The stock currently possesses a high price-to-earnings ratio of 40 and a price-to-book value of 2.4. Loblaw and Metro offer quarterly dividend payouts, albeit both yields are modest. The dividend yield at Loblaw is 1.7% and Metro offers a 1.4% yield.

Both stocks are trading at the high end of their respective 52-week ranges. Metro and Loblaw have both elected to invest in e-commerce options for customers in order to stave off the threat from Amazon.

Canadians will eagerly await the Food Price Report for 2020, but current trends indicate that we will see food prices continue to rise into the early part of the next decade.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. David Gardner owns shares of Amazon. The Motley Fool owns shares of Amazon.

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